MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Annual Report
August 31, 1995
Officers and Directors
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A, Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Walter D. Rogers, Vice President and
Portfolio Manager
Gerald M. Richard, Treasurer
Thomas D. Jones III, Secretary
Custodian
State Street Bank and Trust Company
One Heritage Drive, P2N
North Quincy, MA 02171
<PAGE>
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Merrill Lynch
Utility Income Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
During the August quarter, US economic indicators continued to
suggest that economic growth is moderate and that the rate of
inflation remains low. Gross domestic product (GDP) growth for the
three months ended June 30 were revised to show that the economy
expanded at a 1.1% pace, rather than the 0.5% rate that was
originally reported. However, although the employment report for
August exceeded consensus expectations, most of the new jobs created
were in the service sector, reflecting the ongoing sluggishness in
manufacturing. In addition, total hours worked and hourly wages
declined in August. Other lackluster economic indicators included
disappointing durable goods orders in July and continued poor retail
sales results.
After gaining ground in recent weeks, the US dollar has strengthened
relative to the yen and the Deutschemark. Improving interest rate
differentials favoring the US currency, combined with coordinated
central bank intervention and more positive investor sentiment, have
helped to bolster the dollar in foreign exchange markets. Other
factors that appear to be improving the US dollar's outlook in the
near term are a pick-up in capital flows to the United States and
the prospect of increased capital outflows from Japan. However, it
remains to be seen if the US dollar's strengthening trend can
continue without significant improvements in the US budget and trade
deficits.
In the weeks ahead, investor interest will continue to focus on US
economic activity. Clear signs of a moderate, noninflationary
expansion could further benefit the US stock and bond markets. In
addition, should the current Federal budget deficit reduction
efforts now underway in Washington prove successful, the
implications would likely be positive for the US financial markets.
Portfolio Matters
During the quarter ended August 31, 1995, "merger mania" struck the
electric utility sector. On August 14, 1995, two mergers were
proposed. One was a merger of equals between Union Electric Co. and
Cipsco Inc., as both sides came to a definitive agreement in a stock-
for-stock transaction. The second was a proposed transaction with
PECO Energy Co. looking to acquire Pennsylvania Power & Light Co.
(PPL). To date, this proposed unfriendly merger has been rebuffed by
PPL's management. Shortly following these announcements, a third
merger was announced. Public Service Company of Colorado and
Southwestern Public Service Co. agreed to merge in a stock-for-stock
transaction. This merger is different from the first two because the
service territories are not contiguous. In addition to these three
announcements, there are two other pending mergers: Wisconsin Energy
Corp. with Northern States Power Co., and Sierra Pacific Power Co.
with Washington Water Power Co. At the time of the announcements,
the Fund had holdings in six of the ten companies involved in the
various transactions.
<PAGE>
The primary force behind this merger trend in the utility industry
is the need to cut costs, to gain a more favorable position in an
environment of increasing competition. The industry's complex
regulatory structure requires many approvals for transactions to be
completed, and the time to realize cost savings is also spread over
several years. Thus, the time frame for completion of a merger can
be as long as two years and the length of time to realize cost
savings is usually a minimum of five years. Furthermore, as a result
of rate-of-return regulation, the amount of premium and the ability
to recover it are always open questions in an electric utility
merger. Another significant current issue in utility mergers is who
garners the bulk of the cost savings, customers or shareholders. In
the past, as a result of these issues, there was little market
impact at the time that a merger or acquisition was announced. This
is no longer the case. Investors now seem willing to look at the
long-term picture and, so far, have responded favorably to the
merger announcements.
During the August quarter, we added four new positions and
eliminated two. The eliminations consisted of the remainder of our
position in Pacific Telesis Group, and the sale of our holding in
PPL. The announcement by PECO Energy, another Fund holding, that it
wanted to acquire PPL in a stock offering, resulted in a surge in
the latter's share price. We used this opportunity to sell our
position since the offer was unsolicited and PPL became fairly
valued on the run-up, in our estimation. Moreover, hostile mergers
have not previously worked in the utility sector because of the need
to have regulatory support as well as employee and community
agreement.
We added four new companies to the portfolio during the three-month
period ended August 31, 1995. We bought three domestic electric
utility stocks, CILCORP, Inc., Delmarva Power & Light Co. and Kansas
City Power & Light Co.; and one foreign stock, PowerGen PLC. In
addition to sound fundamentals, all had above-industry average
dividend yields. Furthermore, we believe the three new domestic
positions are candidates to participate in the current trend of
industry consolidation, given their fundamentals. PowerGen, one of
the UK's major power generators, combines a continuing restructuring
with successful diversification.
CILCORP, Inc. supplies electricity and gas to central and east
central Illinois. The company's only fuel source for generating
electricity is coal. CILCORP should fare well in a competitive
environment since the number of its residential customers is three
times the number of its industrial and commercial customers.
Delmarva Power & Light Co. is an electric utility company that
services all of Delaware and parts of Maryland and Virginia. The
company also supplies gas in northern Delaware. We believe that the
company is well positioned to enter a more competitive environment
since its electric rates are among the lowest in its service
territories.
<PAGE>
Kansas City Power & Light Co. is an electric utility company that
serves 23 counties in western Missouri and eastern Kansas. The
company derives approximately 95% of its business from metropolitan
Kansas City. In terms of revenues, the company's industrial customer
base is small relative to its residential sales and, as a result, is
not likely to expose the company to significant competition.
Finally, PowerGen PLC has both double-digit per share earnings and
dividend growth. We purchased the utility's partly paid shares since
their yield is substantially higher than that of the fully paid
shares.
Fiscal Year in Review
The primary investment objective of Merrill Lynch Utility Income
Fund, Inc. is high current income. As the stock market reached
record levels during the fiscal year ended August 31, 1995, domestic
electric utility stocks underperformed the unmanaged Standard &
Poor's (S&P) 500 Index on a relative price basis by 8.58%. However,
total returns for the Fund during the fiscal year were in line with
other high current income utility funds. The Fund's Class A and
Class B Shares had total returns of +14.68% and +13.72%,
respectively, while the S&P Electric Utility Index had a total
return of +15.98%. The Fund's Class C and Class D Shares had total
returns of +16.50% and +17.03%, respectively, since inception
October 21, 1994 through August 31, 1995. (Results shown are before
the deduction of sales charges and would be lower if sales charges
were included. For complete performance information, see pages 3--5
of this report to shareholders.)
During the fiscal year, we continued to seek utility investments
with sound fundamentals coupled with high current yields. As a
result, during the past 12 months, we further diversified the
portfolio. We found two investment opportunities in the United
Kingdom which at August 31, 1995 accounted for 5.7% of the Fund's
net assets. Furthermore, we increased our equity weighting in the
domestic US telephone utility sector from 2.0% to 10.1% during the
12 months ended August 31, 1995. This action aided performance since
the domestic telephone sector outperformed the domestic gas and
electric sectors for the 12-month period ending August 31, 1995.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
September 28, 1995
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Fund through the Merrill Lynch Select Pricing SM System,
which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years.
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
Performance data for all of the Fund's Shares are presented in the
"Total Return Based on a $10,000 Investment" graphs on page 4. Data
for Class A and Class B Shares are presented in the "Recent
Performance Results," "Average Annual Total Return" and "Performance
Summary" tables below and on pages 4 and 5. Data for Class C and
Class D Shares are also presented in the "Aggregate Total Return"
table and the "Recent Performance Results" table below and on page
4.
<PAGE>
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class A and Class B
Shares for the 12-month and 3-month periods ended August 31, 1995
and for Class C and Class D Shares for the since inception and 3-
month periods ended August 31, 1995. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
8/31/95 5/31/95 8/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $9.15 $9.08 $8.44 + 8.41% +0.77%
ML Utility Income Fund Class B Shares 9.15 9.08 8.44 + 8.41 +0.77
ML Utility Income Fund Class C Shares 9.14 9.07 8.17 +11.87 +0.77
ML Utility Income Fund Class D Shares 9.15 9.08 8.17 +12.00 +0.77
ML Utility Income Fund Class A Shares--Total Return +14.68(1) +1.98(2)
ML Utility Income Fund Class B Shares--Total Return +13.72(3) +1.78(4)
ML Utility Income Fund Class C Shares--Total Return +16.50(5) +1.78(6)
ML Utility Income Fund Class D Shares--Total Return +17.03(7) +1.91(8)
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class C and Class D Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.478 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.108 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.406 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.090 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.346 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.090 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.377 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.101 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the S&P Electric Utility Index and the S & P 500
Index.
10/29/93** 8/95
ML Utility Income Fund++--
Class A Shares* $ 9,600 $ 9,706
ML Utility Income Fund++--
Class B Shares* $10,000 $ 9,693
S&P Electric Utility Index++++ $10,000 $ 9,713
S&P 500 Index++++++ $10,000 $12,633
<PAGE>
10/21/94** 8/95
ML Utility Income Fund++--
Class C Shares* $10,000 $11,550
ML Utility Income Fund++--
Class D Shares* $ 9,600 $11,235
S&P Electric Utility Index++++ $10,000 $11,602
S&P 500 Index++++ $10,000 $12,369
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses including advisory fees.
**Commencement of Operations.
++ML Utility Income Fund, Inc. invests at least 65% of its total
assets in equity and debt securities which are, in the opinion of
the Fund's management, primarily engaged in the ownership or
operations of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
++++This unmanaged market value-weighted Index is comprised of 25
electric utility companies.
++++++This unmanaged broad-based Index is comprised of common
stocks.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/95 +17.50% +12.80%
Inception (10/29/93)
through 6/30/95 - 0.74 - 3.14
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/95 +16.52% +12.52%
Inception (10/29/93)
through 6/30/95 - 1.50 - 3.28
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
Aggregate Total Return
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 6/30/95 +13.97% +12.97%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (10/21/94)
through 6/30/95 +14.38% + 9.81%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/29/93--12/31/93 $10.00 $9.81 -- $0.043 - 1.46%
1994 9.81 8.28 -- 0.496 -10.59
1/1/95--8/31/95 8.28 9.15 -- 0.327 +14.76
------
Total $0.866
Cumulative total return as of 8/31/95: +1.11%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/29/93--12/31/93 $10.00 $9.80 -- $0.037 - 1.63%
1994 9.80 8.28 -- 0.429 -11.19
1/1/95--8/31/95 8.28 9.15 -- 0.276 +14.10
------
Total $0.742
Cumulative total return as of 8/31/95: - 0.31%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid monthly by Merrill Lynch
Utility Income Fund, Inc. during the fiscal year ended August 31,
1995, 83.53% qualifies for the dividends received deduction for
corporations. Additionally, there were no long-term capital gains
distributed during the year.
Please retain this information for your records.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications 12,500 BellSouth Corp. $ 644,500 $ 859,375 2.0%
45,000 GTE Corp. 1,510,200 1,648,125 3.9
40,000 NYNEX Corp. 1,527,880 1,800,000 4.2
----------- ----------- ------
3,682,580 4,307,500 10.1
Utilities--Electric 57,500 Allegheny Power System, Inc. 1,293,200 1,401,563 3.3
40,900 American Electric Power Company, Inc. 1,519,871 1,395,713 3.3
24,000 Baltimore Gas & Electric Co. 592,328 630,000 1.5
36,000 Boston Edison Co. 936,373 922,500 2.2
6,000 CILCORP, Inc. 217,735 214,500 0.5
26,000 CINergy Corp. 673,299 666,250 1.6
26,000 Carolina Power & Light Co. 774,899 796,250 1.9
43,000 Central & Southwest Corp. 986,260 1,053,500 2.5
29,100 Consolidated Edison Company of New York 980,888 822,075 1.9
20,000 Delmarva Power & Light Co. 411,288 435,000 1.0
18,400 Detroit Edison Co. 595,472 563,500 1.3
20,800 Dominion Resources, Inc. 980,112 751,400 1.8
25,300 Duke Power Co. 1,101,816 1,027,813 2.4
18,100 Entergy Corp. 466,075 434,400 1.0
23,500 FPL Group, Inc. 919,184 913,563 2.1
20,500 General Public Utilities Corp. 527,875 586,812 1.4
34,800 Houston Industries, Inc. 1,542,820 1,474,650 3.5
10,000 Kansas City Power & Light Co. 228,100 223,750 0.5
325,000 National Power PLC (Part Pay)(a) 942,361 1,179,231 2.8
47,500 National Power PLC (Part Pay)(ADR)*(b) 564,775 694,687 1.6
23,000 New England Electric System 766,360 805,000 1.9
27,000 New York State Electric & Gas Corp. 780,994 651,375 1.5
35,700 Northeast Utilities Co. 907,836 816,637 1.9
11,000 Northern States Power Co. 479,160 468,875 1.1
24,900 Ohio Edison Co. 559,888 538,462 1.3
21,000 Oklahoma Gas & Electric Co. 757,886 742,875 1.7
20,400 PECO Energy Co. 624,518 543,150 1.3
45,000 Pacific Gas & Electric Co. 1,151,550 1,293,750 3.0
34,800 PacifiCorp 680,713 630,750 1.5
135,000 PowerGen PLC (Part Pay)(c) 602,638 573,567 1.3
20,000 Public Service Company of Colorado 636,200 647,500 1.5
40,400 Public Service Enterprise Group, Inc. 1,319,991 1,111,000 2.6
42,200 SCEcorp 887,436 701,575 1.6
88,400 Southern Co. 1,939,156 1,867,450 4.4
26,600 Unicom Corp. 785,722 748,125 1.7
12,600 Union Electric Co. 513,993 448,875 1.0
20,000 Western Resources Co. 562,500 605,000 1.4
18,400 Wisconsin Energy Corp. 477,204 494,500 1.2
----------- ----------- ------
30,688,476 29,875,623 70.0
Total Stocks 34,371,056 34,183,123 80.1
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications $1,000,000 Southwestern Bell Corp., 7.00% due
7/01/2015 $ 1,034,480 $ 982,190 2.3%
1,000,000 Tele-Communications, Inc., 9.80%
due 2/01/2012 1,263,890 1,122,500 2.6
1,000,000 United Telephone of Florida, 6.875%
due 7/15/2013 1,019,950 947,840 2.2
----------- ----------- ------
3,318,320 3,052,530 7.1
Utilities--Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 961,600 2.2
Utilities--Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,428,660 3.3
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,047,540 2.5
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 972,290 2.3
----------- ----------- ------
3,605,780 3,448,490 8.1
Total Corporate Bonds 7,915,400 7,462,620 17.4
Short-Term Securities
Commercial Paper** 539,000 General Electric Capital Corp., 5.82%
due 9/01/1995 539,000 539,000 1.3
Total Short-Term Securities 539,000 539,000 1.3
Total Investments $42,825,456 42,184,743 98.8
===========
Other Assets Less Liabilities 501,105 1.2
----------- ------
Net Assets $42,685,848 100.0%
=========== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
(a)The Fund is obligated to pay the remaining 63%, approximately
$1,512,000, during the next two years.
(b)The Fund is obligated to pay the remaining 63%, approximately
$950,000, during the next two years.
(c)The Fund is obligated to pay the remaining 53%, approximately
$685,000, during the next two years.
See Notes to Financial Statements.
</TABLE>
<PAGE>
PORTFOLIO INFORMATION (unaudited)
For the Quarter Ended August 31, 1995
Percent of
Ten Largest Holdings Net Assets
National Power PLC (Part Pay)* 4.4%
Southern Co 4.4
NYNEX Corp. 4.2
GTE Corp. 3.9
Houston Industries, Inc. 3.5
ENSERCH Corp., 6.375% due 2/01/2004 3.3
Allegheny Power System, Inc. 3.3
American Electric Power Company, Inc. 3.3
Pacific Gas & Electric Co. 3.0
Tele-Communications, Inc., 9.80%
due 2/01/2012 2.6
[FN]
*Includes foreign and ADR Shares.
Additions
CILCORP, Inc.
Delmarva Power & Light Co.
Kansas City Power & Light Co.
PowerGen PLC (Part Pay)
Deletions
Pacific Telesis Group
Pennsylvania Power & Light Co.
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$42,825,456) (Note 1a) $42,184,743
Cash 101,847
Receivables:
Dividends $ 283,488
Capital shares sold 129,065
Investment adviser (Note 2) 96,161
Interest 79,860 588,574
-----------
Deferred organization expenses (Note 1f) 57,380
Prepaid registration fees and other assets (Note 1f) 68,494
-----------
Total assets 43,001,038
-----------
Liabilities: Payables:
Capital shares redeemed 219,064
Distributor (Note 2) 24,803 243,867
-----------
Accrued expenses and other liabilities 71,323
-----------
Total liabilities 315,190
-----------
Net Assets: Net assets $42,685,848
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 35,550
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 409,618
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 15,070
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 6,098
Paid-in capital in excess of par 43,809,796
Undistributed investment income--net 626,564
Accumulated realized capital losses on investments
and foreign currency transactions--net (Note 5) (1,574,422)
Unrealized depreciation on investments and foreign currency
transactions--net (642,426)
-----------
<PAGE>
Net assets $42,685,848
===========
Net Asset Value: Class A--Based on net assets of $3,253,155 and 355,495 shares
outstanding $ 9.15
===========
Class B--Based on net assets of $37,497,638 and 4,096,178 shares
outstanding $ 9.15
===========
Class C--Based on net assets of $1,377,085 and 150,703 shares
outstanding $ 9.14
===========
Class D--Based on net assets of $557,970 and 60,976 shares
outstanding $ 9.15
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the year Ended August 31, 1995
<S> <S> <C> <C>
Investment Dividends (net of $17,100 foreign withholding tax) $ 2,007,788
Income Interest and amortization of premium and discount earned 726,643
(Notes 1d & 1e): -----------
Total income 2,734,431
-----------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 254,354
Investment advisory fees (Note 2) 214,121
Printing and shareholder reports 149,921
Professional fees 98,364
Registration fees (Note 1f) 87,930
Accounting services (Note 2) 63,908
Transfer agent fees--Class B (Note 2) 63,659
Directors' fees and expenses 24,445
Amortization of organization expenses (Note 1f) 18,120
Custodian fees 6,698
Transfer agent fees--Class A (Note 2) 6,217
Account maintenance and distribution fees--Class C (Note 2) 4,992
Transfer agent fees--Class C (Note 2) 1,278
Account maintenance fees--Class D (Note 2) 1,156
Transfer agent fees--Class D (Note 2) 722
Pricing fees 644
Other 7,113
-----------
<PAGE> Total expenses before reimbursement 1,003,642
Reimbursement of expenses (Note 2) (543,478)
-----------
Total expenses after reimbursement 460,164
-----------
Investment income--net 2,274,267
-----------
Realized & Realized loss from:
Unrealized Investments--net (1,044,433)
Gain (Loss) on Foreign currency transactions--net (5,728) (1,050,161)
Investments & -----------
Foreign Currency Change in unrealized depreciation on:
Transactions--Net Investments--net 4,037,112
(Notes 1b, 1c, Foreign currency transactions--net (1,713) 4,035,399
1e & 3): ----------- -----------
Net realized and unrealized gain on investments and
foreign currency transactions 2,985,238
-----------
Net Increase in Net Assets Resulting from Operations $ 5,259,505
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
For the For the Period
Year Ended Oct. 29, 1993++
August 31, to Aug. 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 2,274,267 $ 1,339,757
Realized loss on investments and foreign currency transactions--net (1,050,161) (524,261)
Change in unrealized depreciation on investments and foreign
currency transactions--net 4,035,399 (4,677,825)
----------- -----------
Net increase (decrease) in net assets resulting from operations 5,259,505 (3,862,329)
----------- -----------
<PAGE>
Dividends to Investment income--net:
Shareholders Class A (224,389) (172,046)
(Note 1g): Class B (1,561,530) (984,610)
Class C (24,244) --
Class D (20,641) --
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (1,830,804) (1,156,656)
----------- -----------
Capital Share Net increase in net assets derived from capital share transactions 7,624,468 36,551,664
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase in net assets 11,053,169 31,532,679
Beginning of period 31,632,679 100,000
----------- -----------
End of period* $42,685,848 $31,632,679
=========== ===========
<FN>
*Undistributed investment income--net $ 626,564 $ 183,101
=========== ===========
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B Class C Class D
For the For the For the For the
For the Period For the Period Period Period
The following per share data and ratios have been derived Year Oct. 29, Year Oct. 29, Oct. 21, Oct. 21,
from information provided in the financial statements. Ended 1993++ to Ended 1993++ to 1994++ to 1994++ to
Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1995 1994 1995 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.44 $ 10.00 $ 8.44 $ 10.00 $ 8.17 $ 8.17
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .60 .40 .49 .35 .42 .51
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .59 (1.57) .63 (1.57) .90 .85
------- ------- ------- ------- ------- -------
Total from investment operations 1.19 (1.17) 1.12 (1.22) 1.32 1.36
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.48) (.39) (.41) (.34) (.35) (.38)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.15 $ 8.44 $ 9.15 $ 8.44 $ 9.14 $ 9.15
======= ======= ======= ======= ======= =======
<PAGE>
Total Investment Based on net asset value per share 14.68% (11.84%)+++ 13.72% (12.34%)+++ 16.50%+++ 17.03%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees
and net of reimbursement .49% .44%* .52% 46%* .52%* .49%*
======= ======= ======= ======= ======= =======
Expenses, net of reimbursement .49% .44%* 1.27% 1.21%* 1.32%* .74%*
======= ======= ======= ======= ======= =======
Expenses 1.87% 1.58%* 2.66% 2.35%* 2.77%* 2.10%*
======= ======= ======= ======= ======= =======
Investment income--net 6.60% 5.92%* 5.75% 5.22%* 5.56%* 6.14%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 3,253 $ 4,238 $37,498 $27,395 $ 1,377 $ 558
======= ======= ======= ======= ======= =======
Portfolio turnover 12.59% 8.50% 12.59% 8.50% 12.59% 12.59%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Utility Income Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
<PAGE>
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund is authorized to engage in
transactions in stock index futures and financial futures and
related options on such futures. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an
index-based futures contract, to make and accept a cash settlement
for a set price on a future date. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value
of the contract. Such receipts or payments are known as variation
margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest and capital gains at various rates.
<PAGE>
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis. Dividend income is recorded on the ex-dividend date,
except that if the ex-dividend date has passed, certain dividends
from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense over a five-
year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and distributions-- Dividends from net investment
income are declared and paid monthly. Distribution of capital gains
are recorded on the ex-dividend date.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also en-tered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.55%, on an annual basis,
of the average daily value of the Fund's net assets. The most
restrictive annual expense limitation requires that the Investment
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the average daily
net assets in excess thereof. MLAM's obligation to reimburse the
Fund is limited to the amount of the investment advisory fee. No fee
payment will be made to MLAM during any fiscal year which will cause
such expenses to exceed the most restrictive expense limitation
applicable at the time of such payment. For the year ended August
31, 1995, MLAM earned fees of $214,121, all of which was voluntarily
waived. MLAM also voluntarily reimbursed the Fund for additional
expenses of $329,357.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended August 31, 1995, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 84 $ 1,283
Class D $ 286 $ 4,278
For the year ended August 31, 1995, MLPF&S received contingent
deferred sales charges of $130,486 and $603 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $750 in commissions on the execution of
portfolio security transactions for the Fund for the year ended
August 31, 1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLPF&S, MLFD, MLFDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $13,761,283 and $ 4,470,759,
respectively.
Realized and unrealized losses as of August 31, 1995 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $(1,044,403) $ (640,713)
Short-term investments (30) --
Foreign currency
transactions (5,728) (1,713)
----------- -----------
Total $(1,050,161) $ (642,426)
----------- -----------
As of August 31, 1995, net unrealized depreciation for Federal
income tax purposes aggregated $640,713, of which $1,560,913 related
to appreciated securities and $2,201,626 related to depreciated
securities. At August 31, 1995, the aggregate cost of investments
for Federal income tax purposes was $42,825,456.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $7,624,468 and $36,551,664 for the year ended August 31, 1995
and the period ended August 31, 1994, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 588,987 $ 5,127,162
Shares issued to shareholders
in reinvestment of dividends 17,911 151,496
----------- -----------
Total issued 606,898 5,278,658
Shares redeemed (753,319) (6,544,085)
----------- -----------
Net decrease (146,421) $(1,265,427)
=========== ===========
<PAGE>
Class A Shares for the Period Dollar
Oct. 29, 1993++ to Aug. 31, 1994 Shares Amount
Shares sold 896,487 $ 8,334,878
Shares issued to shareholders
in reinvestment of dividends 12,806 113,825
----------- -----------
Total issued 909,293 8,448,703
Shares redeemed (412,377) (3,586,609)
----------- -----------
Net increase 496,916 $ 4,862,094
=========== ===========
[FN]
++Prior to October 29, 1993 (commencement of operations), the
Fund issued 5,000 Class A Shares to MLAM for $50,000.
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 2,441,589 $20,822,486
Shares issued to shareholders
in reinvestment of dividends 118,910 1,011,809
----------- -----------
Total issued 2,560,499 21,834,295
Automatic conversion of
shares (475) (3,229)
Shares redeemed (1,708,842) (14,750,314)
----------- -----------
Net increase 851,182 $ 7,080,752
=========== ===========
Class B Shares for the Period Dollar
Oct. 29, 1993++ to Aug. 31, 1994 Shares Amount
Shares sold 4,113,267 $39,423,027
Shares issued to shareholders
in reinvestment of dividends 66,851 590,131
----------- -----------
Total issued 4,180,118 40,013,158
Shares redeemed (940,122) (8,323,588)
----------- -----------
Net increase 3,239,996 $31,689,570
=========== ===========
[FN]
++Prior to October 29, 1993 (commencement of operations), the
Fund issued 5,000 Class B Shares to MLAM for $50,000.
<PAGE>
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 204,953 $ 1,771,501
Shares issued to shareholders
in reinvestment of dividends 2,011 17,541
----------- -----------
Total issued 206,964 1,789,042
Shares redeemed (56,261) (500,479)
----------- -----------
Net increase 150,703 $ 1,288,563
=========== ===========
[FN]
++Commencement of Operations.
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 279,017 $ 2,424,080
Automatic conversion of
shares 374 3,229
Shares issued to shareholders
in reinvestment of dividends 1,874 16,144
----------- -----------
Total issued 281,265 2,443,453
Shares redeemed (220,289) (1,922,873)
----------- -----------
Net increase 60,976 $ 520,580
=========== ===========
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At August 31, 1995, the Fund had a net capital loss carryforward of
approximately $950,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Utility Income Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Utility Income Fund, Inc. as of August 31, 1995, the related
statements of operations for the year then ended and changes in net
assets for the year then ended and the period October 29, 1993
(commencement of operations) to August 31, 1994, and the financial
highlights for the year then ended and the period October 29, 1993
(commencement of operations) to August 31, 1994. These financial
statements and the financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1995 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Utility Income Fund, Inc. as of August 31, 1995, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 1995
